Netflix Bets the Farm on Disney

The agreement between Disney and Netflix announced yesterday is rightly described as a watershed moment for OTT TV. This complicated deal includes library titles like Dumbo and Alice in Wonderland (which will be available immediately) and new releases (to be added in 2016 once Disney’s current Starz deal expires). Despite the complexity, the message is simple: over-the-top delivery is now perceived by mainstream content providers as being on par with traditional outlets such as premium pay-tv channels.

This deal between Disney and Netflix comes as a big surprise. As of late, Disney has been steadily increasing its direct involvement with online distribution. Efforts such as Keychest and ‘Watch Disney’ apps have seen the company step up from simply providing content to completely controlling the experience. Having perfected its one-of-a-kind magic in its theme parks, the next logical step would have been to apply that knowledge of customer mangement to the digital realm. Striking a multi-year exclusive distribution deal with Netflix seems in contradiction to the recent trajectory of the company.

Netflix brings some distinct advantages, aside from the huge pile of cash they must have promised Disney as part of the deal. Disney’s recent success with ‘Watch Disney’ apps has shown that a sizable portion of its audience is migrating to screens such as the iPad. Netflix (unlike pay-TV rivals such as Starz) has pole position to deliver to that audience, as it is already on just about every connected device in the US today. As well, Netflix has a dedicated children’s interface, Just for Kids, making it easy for parents to get the right content to their children, and safely so.

For Netflix, having marquee and exclusive content from Disney in the pay-tv window should provide a tremendous shot in the arm. Today, much of Netflix content is available on other services including pay-TV on-demand, yet it has still managed to attract 25 million paying subscribers. Being the only place that consumers can find movies such as National Treasure, Pirates of the Caribbean, and Star Wars should help reignite subscriber growth.

And reigniting subscriber growth has just become critical. Netflix has accumulated over $5 billion in content-related debt and this deal is sure to increase that substantially. While the company may be able to increase prices somewhat in the short term, the only reliable way to remain healthy in the long run is through strong growth.

Can Disney content deliver that growth? I would say that Reed Hastings is betting the company on it.